Americans in Canada: Q and A

As U.S. tax authorities move to crack down on citizens living abroad, many living in Canada have been looking for answers. We asked Christine Perry, cross-border tax expert with Keel Cottrelle LLP, and Jamie Golombek, director of tax and estate planning at CIBC Private Wealth Management, to answer some of the most common questions:

1. Who is an American? There’s a lot of confusion over this especially for people who spent time there as a child but never worked and for the children of Americans born in Canada. Where can people turn for advice on their situation?
CP: Each situation will be different on the facts and an attorney should be consulted; however, there are a few general principles. As a starting point, if you are born in the United States you are a U.S. citizen. There is a narrow exception for diplomats. If you are born outside of the United States to two U.S. citizen parents, you are a U.S. citizen by descent. If you are born outside the United States to one U.S. citizen parent, you have the right to citizenship provided that the parent has met certain physical presence requirements in the U.S. In this case, a positive action is required in order to assert citizenship. Obviously an individual who has naturalized is also a U.S. citizen (although presumably they would be aware of this).
Once an individual has ascertained whether any of these situations apply to them, they must then determine whether they have lost their U.S. citizenship by performing certain acts with the intent of losing their U.S. citizenship. This is overplayed in the media; however, only in a narrow set of circumstances will an individual truly be considered to have lost their citizenship in this manner. Generally, to lose citizenship you must attend at the consulate and receive a Certificate of Loss of Nationality. Because the laws surrounding loss of citizenship (and the relevant sections of the US Immigration and Nationality Act and other pertinent legislation) have undergone a number of permutations over the years, an expert should be consulted to determine citizenship and tax status.
Usually a tax attorney who deals with international issues (and who works with immigration counsel) would be the best resource.

2. How can the IRS track down these missing Americans? The bank disclosure originally set to come into place in 2013 seems like it will make it easier for the IRS to track people.
CP: The risk of discovery varies depending on the circumstance. An individual born in Canada to two U.S. parents may avoid detection even under FATCA because they have no U.S. birthplace and no U.S. identification. Many non-filers however hold U.S. passports or have worked or lived in the United States at some point. Similarly, many individuals will receive inheritances from U.S. persons and will show up on the radar that way. A great deal of information has been absorbed into the system over the years – now, it has become more feasible for IRS (and other government agencies) to centralize and use that information effectively.
For individuals who have some U.S. indica associated with their financial accounts, they will face an “involuntary disclosure” in 2014 when (and perhaps if) FATCA comes into effect.

3. Is there a penalty for failing to file tax returns if no taxes are owing due to foreign tax credits? Will the penalties for failure to file an FBAR apply to Canadian or other investments as well as U.S. accounts?
JG: Since most U.S. penalties and related arrears interest are based on the amount of tax owing and there will likely be no tax owing for most dual citizens since a foreign tax credit can be claimed in respect of Canadian taxes paid, there should be no tax penalties assessed by the IRS.
When it comes to FBAR penalties, however, all non-U.S. financial accounts must be disclosed. U.S. accounts are not considered to be “offshore” from a US perspective and thus are not included in the disclosure requirements.

4. How can the IRS enforce these penalties in Canada?
JG: While the IRS may have some power of collection through the Canada – US tax treaty over US taxes owing as well as interest and penalties on US taxes, the obligation to collect these amounts does not apply in cases where the individual was a citizen of Canada at the time the tax liability arose in the U.S.
As for FBAR penalties, the Canada Revenue Agency has stated that this Article in the Tax treaty does not apply to penalties imposed pursuant to laws that impose only a reporting requirement (such as FBAR) as opposed to those that impose taxation along with reporting requirements) and thus the CRA would not collect FBAR penalties on behalf of the IRS.

5. Can troubles with the IRS affect people’s travel to the United States?
CP: Currently, there is no stated plan of cooperation between IRS and DHS, meaning that tax non-compliance should not, at this point, affect your ability to cross the border. Many people have been stopped and questioned for travelling to the U.S. on a Canadian passport which lists a U.S. birthplace. This occurs because a U.S. person must enter the U.S. on U.S. documents.

6. What are the implications of coming forward now, after the deadline has passed?
JG: You can no longer take advantage of the reduced penalties under OVDI and as a result, could face a penalty of up $10,000 per late-filed FBAR under a normal voluntary disclosure.
CP: Practitioners are hoping to see further guidance from IRS which may provide more certaintly for those coming forward; there was a consensus that the program would have been more successful had the penalty structure been more flexible and had the program been left open until further notice (rather than shut down after 7 months).
People who have issues should seek counsel, determine their status and potential penalties, and begin assembling their information. Once they have a clear picture of their situation they will be able to decide how and when they should proceed. Although IRS has stated that they will not have another voluntary disclsoure, pratictioners are hoping for some further initiative in respect of nationals living abroad.

7. The OVDI applied to 2003 to 2010 but we’ve been hearing of people advised to go back just three years for example. Do people need professional advice on whether filing a smaller number of returns could suffice?
JG: They sure do! Filing only three years is sometimes referred to as a “quiet disclosure” because you don’t actually come forward and fess up to the IRS – you are basically taking your chances that your returns and FBARs will simply be accepted into the system without any penalties being assessed.
But be careful as the IRS frowns on this, according to published statements it has made discouraging this practice.
CP: It is unclear how IRS will treat taxpayers who are discovered making a quiet disclosure. Because IRS has made statements discouraging taxpayers from proceeding this way, there is some risk involved in taking this course of action.